Today, the biannual Consensus Revenue Estimating Conference was held in Lansing.  State Treasurer Nick Khouri, Senate Fiscal Agency Director Ellen Jeffries, and House Fiscal Agency Director Mary Ann Cleary came together to hear testimony and reach a consensus on the numbers that will be used to complete the state budget for the 2016-2017 Fiscal Year.  Today’s conference was a follow-up to the one held in January, revising the estimates they made at that time.  Testimony was provided from the Research Seminar in Quantitative Economics (RSQE) at the University of Michigan, the Federal Reserve Bank of Chicago and from economists from the Department of Treasury, the State Budget Office, and the House and Senate Fiscal Agencies.

According to agreed upon numbers, for the FY16 the General Fund will be $109.7 million less than estimated in January and the School Aid Fund will revised down $64 million from January.  For the FY17 the General Fund will be $75.4 million below projections and the School Aid Fund will be $84 million lower than January estimates.  While not huge decreases, it will have ramifications for the upcoming fiscal year budget that is currently being worked on in the legislature.

Despite some downward revisions to revenue dollars, presenters remained upbeat and optimistic about the economic forecast for Michigan through the next three years.  There were a few major revisions today as compared to the economic forecast in May.  Income tax withholding payments are estimated to be stronger than previously projected and the Corporate Income Tax is down 20% in the current fiscal year.  Additionally, sales tax collections are falling below anticipated levels and experts aren’t sure as to what is contributing to the decrease beyond lower gasoline prices.  Lastly, lottery revenue has been higher than estimated in the current fiscal year, due in part to iLottery.

Highlights from the presentations include:

World Outlook:

• The China PMI is slowing, hurting the overall world economy
• Emerging and developing economies are growing at a slower rate

National Outlook:

• Since 2014  investment in oil and gas exploration has shrunk by 75%
• The labor participation rate has seen a slight increase, due in large part to discouraged unemployed workers re-entering the job market
• Inflation remains under the 2% target and it’s not anticipated that there will be any meaningful acceleration in the near term
• The federal deficit should modestly decrease
• Housing stats are historically week, far below historical averages when adjusted for population
• Real GDP Growth is projected to decline in 2016, from 2.4% in 2015 to 1.9% in 2016, but will rebound in 2017 to 2.6%

Michigan Outlook:

• RSQE extends their outlook of the Michigan recovery period to nine years
• Michigan’s continuing recovery is consistent with national economic growth
• Light vehicle sales will increase but at a decelerating pace, while shares of the Detroit Three will increase through 2018
• The deceleration of job growth reflects the mature nature of economic growth
• By 2018, 73% of jobs lost will be replenished
• Steady growth in real personal income is projected
• RSQE is projecting to following numbers for the unemployment rate; 4.8% in 2016, 4.7% in 2017, and 4.5% in 2018

Michigan Revenue Outlook:

• The lower gas prices are good for consumers, but aren’t good for sales tax collections
• The recovery has been weaker due to slow new home construction
• Income tax payments will continue to roller coaster, but should slightly increase in 2017 and 2018
• There has been a slight increase in net income tax revenue
• The Corporate Income Tax is more volatile and harder to project estimates for collections than the Michigan Business Tax (MBT)
• MBT refunds are expected to peak in FY16, this should prove good for the budgeting process as these refunds have wreaked havoc over the past few years
• Sales tax collections in FY16 are 0.3% below the FY15 level
• Net revenue growth to the state’s General Fund-General Purpose is projected to decrease between 2.9% and 3.3% in FY16

Risk to the Outlooks:

• Increased financial turbulence in China
• The upcoming vote on the United Kingdom leaving the European Union
• 2016 Presidential and Congressional elections
• Commodity prices – this is a volatile and tough area to forecast
• Abnormal weather
• Concerns with the federal government raising interest rates and at what level
• Cyber security – businesses are having to shift spending into this arena
• Michigan’s State Essential Services Assessment creates uncertainty, especially at the local level
• State Treasurer Khouri is concerned with the rise of non-taxable items, such as cloud service and their effect on sales tax revenues going forward

The House, Senate, and administration will use these numbers to complete the state budget for the upcoming fiscal year.  The legislature continues to work toward their goal of completing the budgets by mid-June.  However there remain some major unresolved issues that will have large implications on the state budget, including Detroit Public Schools and the Flint water crisis.

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